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OO RUEHROV RUEHTRO
DE RUEHKH #1070/01 2661154
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O 231154Z SEP 09
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4438
INFO RUCNIAD/IGAD COLLECTIVE
RUEHGG/UN SECURITY COUNCIL COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 03 KHARTOUM 001070 
 
NSC FOR MGAVIN, LETIM 
DEPT PLS PASS USAID FOR AFR/SUDAN 
ADDIS ABABA ALSO FOR USAU 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EPET PGOV SU
SUBJECT: UK Expert Shares Views on Foreign Exchange Reserves, Oil 
Sector 
 
REF: KHARTOUM 895 
 
¶1. (SBU) Summary:  Laura James, Senior Economic Advisor for the UK's 
Department for International Development (DFID) said that 
implementation of the wealth-sharing provisions of the Comprehensive 
Peace Agreement (CPA) have been "fairly smooth", but problems 
remain.  In 2008, the North stopped paying the South its share of 
oil revenues in foreign exchange, shifting payment to Sudanese 
pounds (SPG); the South, which has no economically-significant 
exports, has spent all of its reserves on imports.  Any IMF 
technical assistance that may be provided will facilitate a 
political deal on the handling of reserves.  If the North's argument 
that the recent Permanent Court of Arbitration (PCA) decision 
requires repayment by the South of oil revenues  misallocated under 
the Abyei Roadmap prevails, the Unity Fund may also have to repay 
the North, James noted. 
 
¶2. (SBU) Summary continued:  While, in James' view,  accounting for 
oil revenues is transparent, the underlying contracts are not; 
responsible management of oil reserves would require a review of the 
contracts.  (Note:  Global Witness, in an early September report 
(Septel) on Sudan's oil industry, points out discrepancies in 
reported data, and recommends mechanisms for improving transparency 
across the range of oil-related transactions.  End Note.)  U.S. 
economic sanctions have prevented Sudan from entering into 
agreements with U.S. companies in the oil sector.  This in turn has 
forced Sudan to enter into worse deals than would otherwise have 
been available, as well as helped hide the corruption inherent in 
such arrangements.  Wealth-sharing has not been decentralized, and 
is tightly held by the Government of National Unity's (GNU's) 
Ministry of Finance, making it difficult for states to carry out 
their responsibilities, James noted.  The Government of Southern 
Sudan (GoSS) has entered into a 2 billion SPG (USD 800 million) 
contract for roads which, like grain contracts (Ref), is entirely 
off-budget.  End Summary. 
 
¶2.  (SBU) Pol-Econ Chief met with Dr. Laura James, Senior Economic 
Advisor for the UK's Department for International Development 
(DFID).  James, who said she had followed Sudan's economy for years 
as part of "The Economist" magazine's economic research unit, called 
implementation of the wealth-sharing elements of the Comprehensive 
Peace Agreement (CPA) "fairly smooth", but also said issues remain. 
 
 
--------------------------- ---------------------------Foreign 
Reserves: Entitlement, Management Are Problems 
--------------------------- --------------------------- 
 
¶3.  (SBU) One issue currently under discussion between the North and 
the South, and in aid circles, is management of foreign reserves. 
The North remitted oil revenues to the South in U.S. dollars until 
September 2008, but then began making remittances in local currency 
SPGs.   According to James, the underlying rationale for the switch 
was that the South had begun hoarding dollars.  With its access to 
foreign exchange restricted, the South began to spend down what few 
reserves it had.  The South now has virtually no foreign reserves 
with which to purchase imports. 
 
¶4.   (SBU) Both entitlement to and management of foreign reserves 
have  created problems between the parties.    Recently, the South 
had to ask the North for sufficient foreign exchange to allow its 
officials to travel outside Sudan, James said.  In the NCP-SPLM 
Points of Agreement resulting from the U.S.-led trilateral process, 
the parties to the CPA agreed to refer these issues to the 
International Monetary Fund (IMF).  These questions, however, are 
not merely technical ones; the heads of the Bank of Southern Sudan 
and its parent, the Central Bank of Sudan, are both  professionals, 
have worked together in the past, and have handled transfers between 
the banks with ease, James noted.  Consequently, she believes IMF 
technical assistance will provide political cover for whatever 
political deal the parties are able to make on these two issues. 
 
-------------------------------------------- 
North Argues Arbitration Mandates Repayments 
-------------------------------------------- 
 
¶5.  (SBU) The CPA, of which the Abyei Protocol is a part, sets out a 
formula for the division of oil revenues:  50 percent to the North, 
42 percent to the South, and two percent each to the Misserya and 
Dinka tribes and to the States of South Kordofan and Blue Nile, 
James said.  From 2005 to 2008, the CPA parties were unable to 
decide on the boundaries of the oil-rich Abyei area.  Consequently, 
during that period, Abyei area oil revenues went only to the North. 
In 2008, the Abyei Roadmap was agreed upon as a temporary mechanism 
for allocating between North and South the oil revenues from various 
 
KHARTOUM 00001070  002 OF 003 
 
 
Abyei fields until such time as the Permanent Court of Arbitration 
(PCA), to which the parties had referred the issue of demarcation, 
could render a decision, James noted. 
 
¶6.  (SBU)  The July 2009 arbitration decision decreed that the 
Diffra field was included within the Abyei boundaries.   However, it 
also held that the Heglig and Bamboo fields were not within the 
Abyei area.  After the PCA rendered its decision, the North claimed 
that the implication of the arbitration decision is that the parties 
should look back, and apply the formula from the CPA to rectify any 
misallocations that had taken place under the Abyei Roadmap, James 
said.  Following that  argument, they claimed that any revenue paid 
on oil from the Diffra field should have been divided according to 
the CPA, and thus that the South must repay the North's share.  In 
addition, the NCP claimed that  revenues paid to the South from the 
Heglig and Bamboo fields for the years 2008-9 must be repaid to the 
North because these fields were not determined, based on 
arbitration, to be within the Abyei boundaries. 
 
¶7.  (SBU) If carried to its logical conclusion, James said, the 
North's line of argument will also affect the Unity Fund.  The North 
could base its case by arguing only revenues from the Diffra field 
should have gone into the fund, while the fund should pay back the 
revenues from the Heglig and Bamboo fields that  were mistakenly 
allocated to it. 
 
¶8.  (SBU) One issue that was outstanding in 2008, the year of the 
roadmap, was the issue of USD 9 million in payments that the North 
owed the South.  Those arrears were paid to the South by the North 
in March, James noted. 
 
--------------------------------------- 
Oil Revenues Transparent, Contracts Not 
--------------------------------------- 
 
¶9.  (SBU) In James' view, the reporting of oil revenues is quite 
transparent; it is unlikely that the figures can be faked, or that 
there have been any massive diversions of Southern oil. (Note: 
Global Witness, in its  September report (Septel) on Sudan's oil 
industry, points out discrepancies in reported data, and recommends 
mechanisms for improving transparency across the range of 
oil-related transactions.  End Note.) What is not transparent, 
however, are the terms of the original contracts for exploration and 
sale of the oil.  It is unlikely that the North got the best deal 
possible, she said, and likely that corruption is involved.  It is 
very much in the South's best interest to play a more participatory 
role in the management of the oil sector.  However, what prevents 
the South from playing such a role is their lack of people trained 
and experienced in the sector, James noted. 
 
--------------------------------------------- 
Strategic Management Requires Contract Review 
--------------------------------------------- 
 
¶10.  (SBU) To answer the question of whether Sudan's oil reserves 
are being managed in the best possible way for the long term, one 
would have to review the terms of the existing concessions, and to 
renegotiate them if necessary.  It is probably too late for that 
ever to be accomplished, James said, in light of what appear to be 
cozy arrangements between the companies and government decision 
makers. 
 
----------------------------------------- 
Sanctions Help Hide Corruption, Bad Deals 
----------------------------------------- 
 
¶11.  (SBU) Asked the impact of sanctions on the oil industry, James 
said sanctions keep big companies out, which in turn allows the 
Chinese and Malaysian companies, which otherwise could not compete, 
to come in.  Sanctions have not stopped deals; they have merely 
assured that the deals that are made are not the best ones they 
could be for Sudan.  Even if sanctions were lifted, she said, there 
is no guarantee that other companies would come in.  The existing 
relationships are too well established, and likely too corrupt, to 
brook any interference.  Sanctions have helped cover up the bad 
deals and corruption, she said. 
 
------------------------- 
Darfur Delays Debt Relief 
------------------------- 
 
¶12.  (SBU) Sudan has USD 34 billion worth of debt, much of it 
arrears on 1970s development projects and the accumulated interest. 
The North believed that, after signing the Comprehensive Peace 
Agreement (CPA), the next step was to do debt relief.  In James' 
 
KHARTOUM 00001070  003 OF 003 
 
 
view, the war in Darfur stopped debt relief cold, but the North 
nonetheless felt that a promise had not been delivered, and blames 
the international community for "upping the ante." 
 
-------------------------------- 
Wealth Sharing Not Decentralized 
-------------------------------- 
 
¶13.  (SBU) While most of the wealth sharing focus has been on oil 
and issues linked to the sharing of oil revenues,  James believes 
that issues surrounding the decentralization of wealth sharing are 
of equal significance to the CPA, and have affected whether citizens 
actually receive a peace dividend.  While the Fiscal and Financial 
Allocation and Monitoring Committee (FFAMC) does monitor funds 
transfers to the states, allocation of funds to the states is still 
handled by the Ministry of Finance and is a very political matter. 
State governors have to come in to the Ministry from their states to 
ask for money with which to fund their budgets.  As a result, a 
governor may not know whether he will have sufficient funds with 
which to pay teachers in the schools, she said.  The end result is 
that responsibilities, for education and the like, have in fact been 
devolved down to the state, but access to a predictable quantity of 
funds has not been similarly handed down.  As oil revenues have 
shrunk during the global economic crisis, this problem has become 
very clear. 
 
¶14.  (SBU) A wealth sharing issue that has not gotten much attention 
is access to Nile River water, James said.  Foreign assets held 
abroad, including museum exhibits, money in foreign accounts and 
embassy properties, represent comparatively small amounts of money. 
However, if division of this wealth is not thought through, problems 
between the parties could arise, James noted. 
 
------------------------------------------- 
Enormous Roads Contract Entirely Off-Budget 
------------------------------------------- 
 
¶15.  (SBU) According to James, the Government of Southern Sudan has 
massively overcommitted its income stream.  .  This prevents the 
South from allocating funds to the areas that most need attention. 
Disarmament, Demobilization and Reintegration (DDR) efforts in the 
South are starved for funding, James claimed. 
 
¶16.  (SBU) The problem with GOSS grain contracts (Ref) is 
well-known, James said, but there are other similar problems with 
other contracts that have not yet gotten much attention.  In June, 
the GOSS entered into a contract for the construction of roads with 
Ayot, a Northern Sudanese company.  The total value of the contract 
is 2 billion SPG (approximately USD 800 million), which is paid in 
monthly installments of 10 million SPG (approximately USD 40 
million) per month; the contract will run for six years.  More 
importantly, the contract is entirely off-budget; payments are made 
out of the South's share of oil revenues before they are remitted to 
the South.   James said  the contract has obligated far more than 
the South can hope to gain from oil revenues.  Moreover,  it is 
unclear what the people of Southern Sudan are getting for their 
money.  While the contract may result in roads being built, there 
has been no planning conducted, and most will represent political 
commitments. 
 
¶17.  (SBU) Comment: James' remarks dovetail with the conclusions of 
the September 2009 report (Septel) produced by Global Witness on 
transparency in the oil sector. 
 
WHITEHEAD